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The Ukraine Crisis: Will Sanctions Match the Rhetoric?

March 12, 2014

Law Firm: Dentons Canada LLP - Toronto Office

The developing crisis following Russia's military operations in the Crimea, has provoked a strong reaction from EU and US Governments. However, despite the rhetoric, the approach to the imposing of economic and other sanctions has varied markedly not only between the US and the EU, but between the EU countries themselves. Given the investment both into and from Russia across many key sectors, and Russia's supply of gas to the EU, the prospect of damaging repercussions should Russia impose reciprocal trade and other sanctions has caused a divergence of opinion between Governments as to what measures should be imposed while negotiations are continuing.

Some members of the EU, including Poland, Lithuania and other countries closer to Russia's borders, have favoured a tougher approach, including the suspending of agreements with Russia on visa fee travel and energy, with the threat of further and targeted sanctions. While others, in particular Germany and the Netherlands, have supported a more cautious approach, believing mediation would be more likely to bring a preferable outcome. The varying potential economic impact on each member will largely define the nature of its response. This will also impact on the ability to achieve a consensus.

Following an emergency summit of EU leaders yesterday in Brussels to decide on the EU's response to the crisis, it was announced that:

the EU would suspend current talks with Russia on trade and visa issues;

boycott the G8 summit scheduled to be held in Sochi in June;

unless progress is made in dialogue within a limited timeframe, the EU would consider imposing additional measures such as asset freezes and travel bans and the cancellation of the EU-Russia summit; and

as a last resort, if the situation worsens, the EU warned about "severe and far-reaching consequences" for relations between Russia and the EU and its Member States, "which will include a broad range of economic areas".

Meanwhile, the US Government has suspended military ties and investment treaty talks with Russia, and yesterday announced visa controls on Ukrainian and Russian officials and other individuals who, in its view, are "responsible for, or complicit in, threatening the sovereignty and territorial integrity of Ukraine". The visa restrictions will not extend to the Russian President. What further steps the US intends to take, remains to be seen.

As the amount of trade between the EU and Russia far exceeds that with the US, the possible implications for Russia of EU-wide sanctions are potentially far greater. As will be the affect on the EU (and businesses based in the EU investing in and operating in Russia) of reciprocal sanctions imposed by Russia. The Moscow Times reported yesterday that the Russian Federation Council is drafting legislation which will include giving power to the Russian Government to confiscate the property of US and EU countries in retaliation for sanctions imposed against Russia.

Under EU law, there are various procedures required for adopting legal instruments which impose restrictive measures that provide for the reduction or interruption of economic relations with a third party. These include formal adoption of a "Common Position". This requires the unanimous approval of the EU Member States in Council, followed by (or parallel to which) the Commission is required to make a proposal for Council Regulation. The process may differ depending on the exact nature of the restrictive measures and the targets at which they are aimed.

At the time of writing, it is unclear what the nature and extent of Russia's response will be. Whatever that response may be, the impact on foreign as well as domestic investor sentiment in Russia and the repercussions throughout Europe could be severe.

We are continuing to monitor the position and will provide further bulletins as events develop.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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